Gold Prices Will Soar Past $2,500 As Central Banks Buy it Up

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With governments all over the planet buying up gold over the past five years, it's no wonder gold prices have risen 142% since 2008.

Central banks bought 254.2 tons in the first half of 2012 and may add close to 500 tons for all of 2012, the World Gold Council said last month.

According to the International Monetary Fund (IMF), Russia added 18.6 metric tons of gold in July. South Korea bought 16 tons -- a 30% increase. Kazakhstan increased their bullion reserves for a 12th consecutive month.

Turkey, Ukraine and the Kyrgyz Republic also joined the party.

And the buying continued in August, albeit at a more moderate pace, the IMF confirmed.

"Gold prices continue to be underpinned by growing demand from central banks...we believe this trend is likely to ramp up once liquidity increases in global markets," Justin Harper, markets strategist at IG Markets, told MarketWatch.

That means the cheap money policies by many of these same central banks, such as the Federal Reserve's recently announced QE3 program, will also help fuel the rise in gold prices.

Combine that with skyrocketing demand from the private sector, and government hoarding could easily push the price of bullion as high as $2,500 in 2013.

In fact, the rally could be similar to gold's big breakout move in 2007, when gold prices surged 60%, according to Citi FX Pro analyst Tom Fitzpatrick.

Why Governments Want Gold Now

This central bank gold buying marks a major shift in policy.

After all, for the better part of the last 50 years central banks had been net sellers of gold.

One change was brought about by the banks themselves in 1999, with the Central Bank Gold Agreement (also known as the Washington Agreement on Gold).

All those years of selling had destabilized the gold market and driven prices sharply down. The agreement restricted sales to 400 tons a year for the next five years.

Signed by the European Central Bank (ECB), the 11 national central banks of the Eurozone, plus those of Sweden, Switzerland and the United Kingdom, it was renewed in 2004 and again in 2009.

But all the central banks stopped selling gold altogether in 2009, instead becoming the net buyers they remain today.

The abrupt shift in policy was brought about by the global financial crisis.

The massive increase in the global money supply and the high level of systemic risk spawned by the crisis drove them to diversify their foreign reserves by buying gold.

Simply put, they wanted to diversify away from the U.S. dollar, the euro and other fiat currencies and buy gold as an alternative.

Since then, they've settled into a pattern of gold-buying that has been a major force behind the surging price of gold.

And that trend is unlikely to stop as emerging markets catch up to developed economies' gold hoards.

Emerging Markets' Gold-Buying Binge

Emerging market economies hold far less of the yellow metal than the nations of Europe or the United States. This gap has prompted their aggressive gold buying.

Just look at China. It's an open secret that China has been quietly dumping its massive $3.24 trillion in foreign reserves and buying lots of gold.

And many analysts expect the People's Bank of China to announce soon that they have doubled their gold reserves to over 2,000 tons.

Still, China's gold reserves remain miniscule as a percent of the overall foreign exchange reserves - less than 2%.

On the other hand, the U.S., Germany, France and Italy have over 70% of their forex reserves in gold.

Considering the tiny amounts of gold in emerging nation's banks, countries with massive foreign exchange reserves are likely to buy even more gold.

In other words, central banks are now likely to be net buyers for a long time to come, putting a structural floor under the market.

Investing in Gold

Given the glistening future, almost every investor should have some exposure to rising gold prices.

Investors can track the price of physical gold in the form of shares in the SPDR Gold Trust (NYSEArca: GLD). You also should own some quality stocks in the sector -- many can be found in the Vanguard Precious Metals and Mining Fund (MUTF: VGPMX).

Editors Note: For a detailed report on how to buy physical gold, click here .

If stocks are more your thing, there are some gold miners on the rise: IAMGOLD Corp. (NYSE: IAG), Tanzanian Royalty Exploration Corp. (NYSE: TRX) and Golden Star Resources Ltd. (NYSE: GSS).

Investors should get used to pricier gold. While some dips could appear due to occasional profit-taking, its long-term bull run continues.

"There's no mania like gold mania," said Peter Krauth, a noted expert in precious metals and Money Morning's global resources specialist. "And despite the fact that we've been in a powerful gold bull market for more than a decade already, I believe the best is yet to come for gold prices."

That's why Krauth has a strategy to profit from the growing global demand for gold.

To find out more from Krauth about how investors can get in on the action, click here.

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